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FX Update - Oil prices remain vulnerable

Written by Ian Dobbs on March 17th, 2015.      0 comments

3:00pm(NZT)
Market Overview:
The USD is seeing some profit taking ahead of what could be a very interesting FOMC statement on Thursday morning. The language used in that statement will be closely analysed for signals the Fed remain on course to hike rates in June. Recent soft US data releases do raise the prospect the Fed could come across somewhat ‘dovish’ and this would likely see a much broader period of USD weakness. Oil prices remain focus with crude trading to fresh six year lows in recent days. It’s hard to see a significant recovery in prices in the near term. Inventories of stored oil are at their highest level since 1982 and if a deal is reached with Iran on its nuclear programme, they could then restart oil exports. This would add further downside pressure to oil prices and have implications for global inflation.
 

Australia
Last week from Australia we saw declines in business confidence and consumer sentiment readings. Both of these support the case for further easing’s, as did a decline in inflation expectations. However, the key employment data was a touch better than forecast coming in at +15.6k, with unemployment falling to 6.3%. Although the fall in unemployment was welcome, the Reserve Bank of Australia (RBA) expects that rate to continue to climb in the near term, and this recent data won’t have impacted their bias for another interest rate cut in the coming months. That outlook should continue to weigh on the Australian dollar, or at least limit any periods of strength from current levels. This week to draw focus we have the RBA minutes, the quarterly RBA bulletin, and a speech from Governor Stevens.
 

New Zealand
The Reserve Bank of New Zealand (RBNZ) reaffirmed last week they are comfortably ‘neutral’ in terms of an interest rate bias at this stage. Inflation may well fall to zero over the coming months, but the bank believes it will gradually return toward two percent. They also believe the level of the New Zealand dollar remains unjustified and unsustainable. The reaction of the currency to last week’s RBNZ statement suggests the market is not so convinced. On Friday we saw the Business NZ manufacturing PMI and it rose to 55.9 from 50.7 prior. That marks the 29th straight month in expansion (i.e. over 50), and the new orders component was the strongest since November 2013. This week to draw focus we have another dairy auction from Fonterra along with quarterly GDP data. The market is expecting a GDP result of 0.8% which would be down slightly from the prior 1.0%.
 

United States
A couple of releases from the United States late last week suggested that the economy may not be as strong as employment data suggests. US retail sales figures were particularly disappointing, as they contracted for the third month in a row. More than any other indicator, the divergence between retail sales and employment is starting raise some real concerns. Supporting the slightly less optimistic outlook for the economy was consumer sentiment data released on Friday. The index dropped to 91.2 from 95.4 prior. The market was expecting a small increase. Although this marks the second straight decline, the index is coming off a very healthy peak and its current level is still consistent with GDP growth around 3.3 percent, according the survey director. Producer prices were also released on Friday and these came in at -0.5% vs +0.1% expected. This is the fourth straight monthly decline and it suggests there are no pipeline inflation pressures, even though energy prices seem to have stabilised somewhat recently. A stronger US dollar will certainly be having an impact here by lowering costs for many American firms. This week is all about the Fed. They release their rate statement early on Thursday morning and the market is very keen to see if they are still on track for a potential rate hike around June.


United Kingdom
Apart from the trade balance that came in better than forecast, data from the UK last week was somewhat disappointing. Manufacturing production, industrial production, and construction output all missed expectations and declined from the prior readings. These results by themselves haven’t been enough to impact the current optimistic outlook for the UK economy which remains on track for an interest rate hike by the Bank of England (BOE) either late this year or early 2016. We get the minutes from the bank’s latest monetary policy meeting this week, which always make interesting reading. We also have the annual budget release and employment change data to digest. UK elections are also just around the corner, set for May 7th, and uncertainty in the lead up to these may weigh on confidence data over the coming weeks.
 

Europe
For the most part, data out of Europe last week continued to show the ‘green shoots’ of recovery. Sentix investor confidence improved for the third straight reading, French industrial production came in stronger than expected, as did French inflation and the German wholesale price index. ECB President Draghi was on the wires last night conveying an optimistic tone. He said indicators suggest a sustained recovery is taking hold, with confidence amount firms and consumers rising. The added the nascent recovery offers a window of opportunity for much needed structural and governance reforms. Tonight we get German ZEW economic sentiment data and the final reading of Eurozone inflation. Later in the week the ECB economic bulletin and the EU economic summit will draw focus.
 

Japan
Over the past week a number of forward looking indicators have shown some improvement in Japan. The economy watches sentiment index, consumer confidence, tertiary industry activity and core machinery orders all came in better than forecast. The Bank of Japan (BOJ) will be pleased to see some improvement in the data and it should serve to reinforce their commitment to maintain current policy settings. They release they monetary policy statement later today and no change is expected in terms of their policy framework. Low oil prices will continue to weigh on near term inflation figures, but this shouldn’t be enough to trigger additional easing’s from the bank at this stage. Key wage negotiations are set to commence this week for a number of corporates and these are hugely important for the longer term inflation outlook.
 

Canada
Key employment data from Canada on Friday proved to be something of a mixed bag. The economy lost 1,000 jobs in February which was better than the forecast for -3.5k. However, it was enough to push the unemployment rate up to 6.8%. Not surprisingly the biggest job losses came from oil producing regions with Alberta posting a 14k decline in employment and its highest jobless rate since 2011. The fear is that this is just the beginning of the impact from declining oil prices. This week’s sees a number it top tier economic releases for the market to digest. Manufacturing sales, wholesale sales, inflation, and retail sales are all set to hit the wires.
 

Major Announcements last week:
  • Chinese Inflation +1.2% vs .8% expected
  • Australian Home Loans -3.5% vs -2.0% expected
  • Chinese Retail Sales 10.7% vs 11.7% expected
  • UK Manufacturing Prod. 1.9% vs 2.6% expected
  • RBNZ leaves monetary policy unchanged as expected
  • Australian Unemployment rate 6.3% as expected
  • US Retail Sales +.6% vs +.3% expected
  • Canadian Unemployment rate 6.8% vs 6.7% expected
 

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